Investment Banking and Brokerage

Investment manager says valuation ‘warning signs are flashing’ – but hopes ratio will fall


High market valuations are a cause for concern, an investment manager has warned, but he hopes that ratios will fall so that investors feel more comfortable with overvalued stocks.

James Andrew, head of investment management for Redmayne Bentley, said that the S&P500 cyclically adjusted price-to-earnings ratio, known as CAPE or the Shiller PE, was at 30 times its historical average. He claimed that "warning signs are flashing" for investors.

Valuation 'warning signs are flashing,' says investment manager

"The Shiller CAPE is at 30 times its historical average, which has been something like 16.8 times, so clearly that's a concern," Andrew told CNBC's Street Signs on Thursday. "I think it's been higher a couple of times previously."

Andrew added: "The warning signs are flashing with regards to valuation but the key in valuations is not just the price, there are two sides to it - there's the earnings (growth). If you look at the latest numbers, Q1 earnings rose by something like 15.5 percent, versus the S&P which did 5.5 percent in that quarter."

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The investment manager said that earnings growth and prices growing "in moderation" were what investors would want to see in order to be "more comfortable with these quite heavy valuations."

In April the Nobel laureate Robert Shiller, who came up with the Shiller PE ratio, told CNBC that high market valuations were making the market 'dangerous'. "I'm not saying pull out of the market – I'm saying that it looks dangerous now," the Yale economic professor said. "But it could keep going up."